Clean Up Your Books Before Selling
It's best to eliminate the running of excessive personal expenses through the company, or the skimming of cash, several years before selling your business. In reviewing a marketing package for the sale of a business, one of the first things a buyer is going to see is the normalization of cash flow (SDE) that shows those messy personal expense add-backs. First impressions are lasting impressions and messy normalizations definitely create a negative impression from the beginning.
Personal expense add-backs might include a number of non-business expenses, such as vehicles for you and your family; household; travel, vacation, meals, and entertainment; insurance; professional fees; membership dues; country clubs; and season tickets. It may also include payroll checks to family members not essential for the operation of the business.
3 Reasons To Eliminate Or Minimize Personal Expense Add-backs
Avoid the messy cash flow (SDE) normalization. Buyers prefer businesses that are clean.
Buyers tend to be a distrustful lot. If a buyer sees personal expenses that are so exorbitant that it may border on tax evasion, they begin to lose faith in the integrity of the seller.
Many business sale transactions are financed by lenders. While you may be able to convince a buyer that personal expense add-backs are justified, lenders will not consider those expenses as part of SDE for their evaluation purposes. This means a lower sales price for your business.
Many owners have been running small personal expenses through the business for so long, they've forgotten about them. Those expenses can add up quickly and significantly reduce SDE. In preparing for a sale of your business, the best thing to do is to completely eliminate those non-business expenses so you can maximize cash flow. A couple of years of "clean" records will make the selling process smoother and yield a higher sale price.
Stop skimming cash when selling a business.
When it comes to preparing to sell your business, if you are skimming cash, stop doing it, period. The extra cash flowing through the company coffers will increase the value of the business, likely by a factor of two to four times the unreported cash.
Excessive tax avoidance negatively impacts your ability to sell C-Corporation stock.
Prospective sellers should be aware that buyers are unlikely to acquire the stock of a C-Corporation that has a potential tax liability for excessive personal expenses run through the business or for skimmed cash. This is just another reason to run your business on the "up and up."